Is MP3 Here to Stay?

Electronic News, June 25, 2001 by Peter Brown

Napster's downfall, Microsoft's machinations may be stalling the market

It's been a little less than three years since the original Diamond Multimedia Rio MP3 player burst onto the consumer market. At the time of its debut, portable digital music was still a novelty and not easy to come by. Boy, how things have changed. Since the Rio's debut in 1998, digital music players of many stripes and styles have cropped up. In only a few short years, this market has exploded. But questions remain: Are these products selling, and will the market have sustainable growth in years to come? Industry observers say that digital music, once scorchingly hot, has in the last few months cooled off dramatically. Napster, the ubiquitous MP3 file-sharing service, is down if not quite out, and now comes word that Microsoft Corp. may no longer support MP3 files in future versions of its Windows media players.

"With some of the consumers we have talked to, it sure seems like things are slowing down," said David Huff-man, manager of the audio business segment at Intel Corp., Santa Clara, Calif. In the first quarter of this year, Intel (nasdaq: INTC) released the Intel Pocket Concert Audio Player, the company's own MP3 market entry. "It could be part of the economic slowdown because people have less disposable income for products such as MP3 players. Or it could be people are hesitant to adopt the technology after (what happened to) Napster. Regardless, I believe people will still find other ways to share music whether it's ...Napster or another file-sharing system," Huffman said.

For its own part, Intel is not slowing down its MP3 product portfolio expansion plans, Huffman said. The company is looking to roll out additional players in the near future and is taking a close look at hybrid devices such as CD/MP3 players and other products that could prove popular in the digital music community. Huffman believes the digital music market will be around for the long haul, despite any stort-term bumps in the road to widespread adoption.

"Part of the problem is that this is still an early adopter item. Everyone that wants an MP3 player already has one," said Ty Goltz, an analyst with Jon Peddie Associates (JPA), Mill Valley, Calif. "Companies are finding out now that it's hard to determine whether or not the general public will adopt this technology. This is a difficult technology to understand and figure out for those who are not early adopters."

Goltz also said that, beyond the static MP3 players, demand for hybrid MP3/CD players and like products is not driving the market. "Those that want a cell phone usually won't pay more for one that has MP3 capability," she said. "The same goes for PDAs and whatever else you can think of. That is always going to be a niche market."

However, static MP3 players are set for what appears to be good growth, according to Goltz. JPA forecasts the MP3 player market as a whole growing from 3.4 million units in 2000 to 21.1 million units by 2005.

Hybrids Among Us

Sonicblue Inc., formerly known as S3 and based in Santa Clara, Calif., bought Diamond Multimedia, the creator of the Rio MP3 player. Sonicblue (nasdaq: SBLU) is one of the largest suppliers of MP3 products with revenues of $65.5 million, or 12.2 percent of the company's overall revenue, coming from its Rio line, according to Goltz. Sonicblue is pushing hard for a piece of the hybrid MP3-player pie with several products, including its RioVolt MP3/CD player and the company's RioReceiver in-home MP3 stereo system.

According to Jonathan Sasse, the strategic marketing manager for Sonicblue's Rio Group, the company's hybrid MP3 products are selling well in the market and, despite Napster's decline, the company is continuing to move forward with its plans to expand the Rio product line. Sasse even believes that the MP3 player market might have benefited from Napster's troubles.

"It's reasonable to say that awareness has been raised regarding MP3s as a whole, and when that happens, that is a benefit by itself," Sasse said. "When you raise awareness, the potential for people buying your products increases substantially."

However, industry analysts and observers say that the hybrid MP3-player market may not be doing as well as some companies are leading on. Reports are circulating that companies are pulling product lines from the shelves of major retail chains and canceling other products because they are simply not selling. Non-hybrid MP3 players are growing by as much as 50 percent year-over-year from 2000, but not the hybrids, Intel said.

Intel's Huffman said that the microprocessor giant has done studies and focus groups that indicate that products such as PDAs and cell phones are probably not going to sell well to people who want digital music. Consumers looking for PDAs and cell phones consider digital music a secondary, or even tertiary, benefit while consumers looking for a digital music player want just that: a player. Huffman added that hybrid MP3 players have been received well since both focus on the music alone.